Thursday, November 27, 2014

Investing in the Rise and Fall of the Markets


Up until now, I have been leading you to see the big picture.  Believe me, there’s more to come.  In the last month we have talked about savings versus investing, investing can be easy and paying yourself first. Now that you have a good understanding of “why” these topics matter, let’s talk about how to put investing into action to fuel your dreams.  

Have you ever walked into a fast food restaurant and only kind of had an idea what you wanted to eat?  Weren’t you grateful that places like Dairy Queen, McDonald’s, or A&W made your selection easy?  When you looked at the menu board, the choices were simplified.  You knew in advance you wanted the basics: a burger, fries, and a beverage.  You then only had to decide whether to choose chicken, beef or fish.    The reason you went there in the first place may have been to pick up something quick and simple so you could get on with your life. 

Oddly, people often ask questions like “What can I do” or “How can I do it?”   Needless to say, we neglect to add, “the simple way.” 

“What can I do the simple way?”

                                 “How can I do it the simple way?”

If things become too complicated or if we believe things are too complicated, we avoid doing anything. This happens way too often when it comes to investing. Is there a simple way to invest? The answer is yes unless you prefer the complicated route.

You may have heard the term, “mutual funds,” but you weren’t sure what they were or whether they were suited for you.  The word “mutual” by itself means common.  Having something in common generally means we are interested in the same thing, the same goals, or achieving the same results.  With mutual funds, we are simply combining our money together in one pool to be invested in different securities, such as specific stocks, bonds, and cash investments.  The best news is that professional managers, who oversee the funds, do the work of researching investments with potential earning power for you.  Not only do they select quality investments, they understand when to take advantage of buying and selling opportunities in the markets.  All the decision-making about the individual investments is left in their hands.  Imagine all these diversified investments bundled into one package suitable for you! Whether you are interested in Canada, U.S., international, or global funds; bond, stock or index funds; balanced or specialty funds, the suitable combination can be found. You have choices that are simplified to meet your investment needs.  

 Can Investing Really Be Easy is written to help you understand what type of investor you are based on your time horizon and risk tolerance. This is important because next you will be choosing the specific investments.  The way you walk into a fast food restaurant and make your selection of food choices, can be virtually the same experience with your investments. The biggest difference is having a competent investment advisor help with your selection.  You are not walking this journey alone unless you prefer to go with on-line trading.

Now you are ready. You have made the commitment to pay yourself; you know which investment is suitable; and now it’s time to find the best way to accomplish this.  Your money can simply be placed first into a savings account and later invested into the market but there’s a better way with the “Dollar Cost Averaging” approach. To minimize your risk, the recommendation is to make regular consistent investments over a long period of time versus a one-time lump sum investment.

The Dollar Cost Average Advantage
Investment Amount
Unit Price
Units Purchased
Total Units
$100.00
$ 10.00
10.00
10.00
$100.00
$   8.00
12.50
25.50
$100.00
$  5.00
20.00
45.50
$100.00
$  6.00
16.66
59.16
$100.00
$  7.00
14.28
73.44
$100.00
$10.00
10.00
83.44
Total      $600.00
 
83.44
 

                       
When money is invested into a mutual fund, you purchase “units”.  Since we understand that markets are like roller coasters, you can expect the unit prices will rise and fall based on the value of the securities. Because we never know how markets will react at any given time, on-going consistent investments allow us to capture both the high and low prices.  When markets fall, this presents an opportunity to acquire more units.


Imagine going to the grocery store and seeing the items you need on sale.  Don’t you love a good sale? Why? Simply because you are able to buy more with the money you intended to spend in the first place. Whether it’s cans of Campbell’s Soup, Bush’s Best Baked Beans, or GoldSeal Sockeye Salmon, you can have more items for $10 when they are on sale compared to when they’re not.  The same strategy applies when buying units in any mutual fund.  When markets drop, you capture more units. Waiting for markets to reverse directions (and they eventually will) will help you realize that more units at a higher value results in more money for your dreams.  At the same time you are reducing your risk and reaping the rewards from the rise and fall of the markets with Dollar Cost Averaging.
 
Fear is useless when investing in the markets.  Even though investing sounds and looks complex, having an open mind to who you are as an investor and the willingness to learn some of the basic investment fundamentals will work in your favor.  Fully understanding your options is one way to overcome fears so you can put investing into action.   

No comments:

Post a Comment